As my colleague, Tjibbe Hoekstra pointed out, according to figures from the Institute of International Finance, November saw foreign assets fly out of emerging markets assets at their fastest pace since the taper tantrum of 2013.
But, according to some emerging markets managers those initial outflows are beginning to subside as investors start differentiating between the rhetoric and the likely reality of what is to come in 2017.
That is not to say that there is a wall of money waiting to go into emerging markets or that a sharp swing toward protectionism by a Trump-led America is not one of the darker alleyways down which an EM investor could wander at present, but it does serve to reiterate that while investor knees have jerked there is actually very little clarity currently on what exactly is to come and as such there is perhaps no reason to follow that jerk with a run for the door.
As Salman Ahmed chief investment strategist at Lombard Odier Investment Managers explained it in the firm’s 2017 outlook: “While the exact stance Trump will take on trade/immigration policy is as yet unknown, we expect trade stagnation rather than trade reversal, prompting a more nuanced view on emerging market dynamics going forward.”
He added: “When it comes to future US trade policy dynamics, however, we believe that it is important to distinguish between a possible further loss of trade integration (or trade “stagnation”) and a possible outright trade “reversal” due to US-led tariff wars. In the current context, we believe cancellation of the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) imply more of the former than the latter and consider these executive actions to be almost certain.”
According to Ahmed, while one cannot entirely discount outright trade wars, there is an argument to be made that the damage such policies would cause to the US economy means there is a good chance “the establishment wing of Mr. Trump’s team will blunt his aggressive stance and instead focus attention on his fiscal policy priorities”.
In such a world, of trade stagnation, Ahmed said, domestic demand drivers of emerging markets, economic growth will become more important both from an economic policy and an asset market dynamics perspective.